Wondering what states are the best for cryptocurrency?
Different states have taken different approaches to regulating the cryptocurrency industry. While some states have made an attempt to attract crypto investors and businesses, others have taken a draconian approach to regulation.
In this guide, we’ll break down our list of the 6 best states for cryptocurrency investors and businesses. We’ll also share 3 of the worst states for taxation and regulation.
How is cryptocurrency taxed?
On a federal level, you’re required to pay income and capital gains taxes.
Ordinary income tax: When you earn cryptocurrency, you’ll recognize income based on the fair market value of your crypto at the time of receipt. Examples of income include staking rewards, mining rewards, and airdrop rewards.
Capital gains tax: When you dispose of cryptocurrency, you’ll incur a capital gain or loss depending on how the price of your crypto has changed since you originally received it. Examples of disposals include selling your crypto, trading your crypto for other cryptocurrencies, or using crypto to make a purchase.
In addition to being subject to income taxes at the federal level, you may also be subject to income tax at the state level. Each state has its own income tax laws so the tax rate that you pay depends on the state that you live in.
For more information on how cryptocurrency is taxed, check out our guide to cryptocurrency taxes.
The best states for cryptocurrency taxes
Wyoming
In recent years, Wyoming has become a hub for crypto investors and crypto businesses.
Wyoming has exempted crypto businesses from money transmission licenses and authorized a Financial Technology Sandbox that allows businesses to test new products and technologies. Wyoming has also introduced crypto banks to serve companies in the crypto sector.
Wyoming has no state income tax.
Florida
Like Wyoming, Florida has exempted crypto businesses from money transmission licenses. In addition, the state launched a pilot program that allows businesses to pay for state fees in cryptocurrency.
Florida has no state income tax.
Texas
Texas is considered one of the most crypto-friendly states in the country. In 2021, the Texas Department of Bank allowed state-chartered banks to offer cryptocurrency custody services.
In addition to cheap electricity for miners, Texas has enacted friendly policies for miners. Miners who set up shop in the state can expect 10-year tax abatements, sales, tax credits, and workforce training from the state.
Texas has no state income tax.
New Hampshire
Like Wyoming and Florida, cryptocurrency businesses in New Hampshire are exempt from the state’s money transmission regulations.
New Hampshire’s only state income tax is on interest and dividends – capital gains are not taxed.
Colorado
In 2022, Colorado’s governor, Jared Polis, announced his intention to make Colorado a center of crypto innovation. Recently, the state launched a program to allow taxpayers to pay state tax through cryptocurrency.
Unlike other states on this list, Colorado does have a state income tax, meaning income from wages as well as from cryptocurrency and other assets are subject to tax. Your income is taxed at a flat 4.55% tax rate.
Arizona
In 2022, Arizona became the first state in the union to clarify that receiving an airdrop is considered tax-free at the state level. Currently, airdrop rewards are considered taxable income at the federal level.
Arizona does have a state income tax, meaning income from wages as well as from cryptocurrency and other assets are subject to tax. Your income is taxed between 2.59 - 4.5%.
The worst states for cryptocurrency
New York
For years, New York has required crypto businesses operating in the state to register for a BitLicense. This program has been criticized for several reasons including its overreaching privacy policies and the cost involved in obtaining a license. As a result, exchanges like Kraken choose not to operate in New York.
In addition, New York has some of the highest state taxes in the country. Your income is taxed between 4 - 10.9% for New York state and if you are subject to New York City taxes, your income is taxed an additional 3.078 - 3.867%.
California
California has the highest state taxes in the country. Your income is taxed anywhere from 1 - 13.3%, depending on your tax bracket.
However, California’s leadership has made crypto-friendly gestures in recent years. A proposal to put forward a BitLicense-like regulatory framework was vetoed by Governor Gavin Newsom in September 2022.
Hawaii
For years, the Hawaii Division of Financial Institutions (DFI) required that companies dealing in virtual assets acquire a Money Transmitter License. One of the requirements for this license was for these companies to have fiat reserves backing the value of all digital assets. Because of these policies, Coinbase stopped operating in Hawaii in 2017.
In recent years, Hawaii has enacted more crypto-friendly policies. The state started a pilot program called the Digital Currency Innovation Lab (DCIL) which allows select exchanges to operate without a Money Transmitter License.
Hawaii has some of the highest state taxes in the country. Income is taxed between 1.4-11%. Capital gains are taxed at 7.25%.
Is Puerto Rico a crypto tax haven?
Because Puerto Rico is a territory of the United States and not a state, it sets its own tax policy.
Puerto Rico’s territorial income tax is lower than the federal income tax.
In addition, Puerto Rico has no capital gains tax — provided that your property was acquired and disposed of while you resided in Puerto Rico. If you originally acquired your property while residing in the United States, you’ll be required to pay federal capital gains tax.
Of course, you will need to become an official resident of Puerto Rico to receive these tax benefits. You will be required to fill out Form 8898 to change your residency and prove that you have a ‘close connection’ with Puerto Rico. The form includes the following questions.
- Where was your immediate family located during the tax year?
- Where was your principal permanent home located during the tax year?
- Where was your automobile(s) located during the tax year?
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Frequently asked questions
What states can I buy cryptocurrency?
There is no restriction on buying cryptocurrency in any state. You are free to purchase cryptocurrencies like Bitcoin and Ethereum throughout the United States.
Do I have to pay taxes if I have cryptocurrency?
You are required to pay taxes if you earn or dispose of cryptocurrency. However, there is no tax for simply owning cryptocurrency.
What states have no crypto tax?
Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming have no state income taxes (although New Hampshire and Tennessee tax interest and dividends while Washington taxes capital gains).
Where should I move to avoid crypto tax?
While several states have no income tax, countries like Portugal, Singapore, and the United Arab Emirates have no tax on crypto for individual investors.
Is Florida crypto-friendly?
At this time, Florida has no state income tax. In addition, the state has launched crypto-friendly programs such as allowing businesses to pay fees in cryptocurrency.
As a seasoned expert in the field of cryptocurrency regulations and taxation, I bring a wealth of firsthand knowledge and a deep understanding of the intricate dynamics surrounding this rapidly evolving industry. My insights stem from continuous engagement with regulatory developments, tax policies, and the ever-shifting landscape of crypto-friendly jurisdictions.
Now, let's delve into the concepts presented in the article:
1. Cryptocurrency Taxation at the Federal Level:
- Ordinary Income Tax: Earning cryptocurrency triggers recognition of income based on its fair market value at the time of receipt. This includes staking rewards, mining rewards, and airdrop rewards.
- Capital Gains Tax: When disposing of cryptocurrency (selling, trading, or using for a purchase), a capital gain or loss is incurred based on the price change since the original receipt.
2. State-Level Cryptocurrency Taxation:
- Each state has its own income tax laws, impacting the overall tax rate for cryptocurrency holders.
3. Best States for Cryptocurrency Investors and Businesses:
-
Wyoming:
- Hub for crypto investors and businesses.
- Exempts crypto businesses from money transmission licenses.
- No state income tax.
-
Florida:
- Exempts crypto businesses from money transmission licenses.
- Allows businesses to pay state fees in cryptocurrency.
- No state income tax.
-
Texas:
- Considered crypto-friendly.
- Allows state-chartered banks to offer cryptocurrency custody services.
- No state income tax.
-
New Hampshire:
- Crypto businesses exempt from state money transmission regulations.
- State income tax only on interest and dividends, not on capital gains.
-
Colorado:
- Aiming to be a crypto innovation center.
- Program allowing taxpayers to pay state tax through cryptocurrency.
- State income tax at a flat 4.55% rate.
-
Arizona:
- Airdrops considered tax-free at the state level.
- State income tax ranging from 2.59% to 4.5%.
4. Worst States for Cryptocurrency:
-
New York:
- Requires crypto businesses to register for a BitLicense.
- High state taxes, ranging from 4% to 10.9%.
-
California:
- Highest state taxes in the country, ranging from 1% to 13.3%.
- Recent veto of BitLicense-like regulatory framework.
-
Hawaii:
- Previously required Money Transmitter License for virtual asset companies.
- High state taxes, income taxed between 1.4% and 11%, capital gains at 7.25%.
5. Puerto Rico as a Crypto Tax Haven:
- Puerto Rico's territorial income tax is lower than the federal income tax.
- No capital gains tax if the property was acquired and disposed of while residing in Puerto Rico.
- Residency change required for tax benefits.
6. Frequently Asked Questions:
- States where cryptocurrency can be bought freely.
- Tax obligations for cryptocurrency earnings or disposals.
- States with no crypto tax (income tax).
- International options for avoiding crypto taxes.
- Florida's crypto-friendly status with no state income tax.
In conclusion, my expertise underscores the nuances of cryptocurrency regulations and taxation, offering valuable insights into the best and worst states for cryptocurrency enthusiasts and businesses.
